2021 Japan tax reform outline

Japan tax alert 22 February 2021

The ruling parties (a coalition comprised of the Liberal Democratic Party and Komeito) released an outline of the 2021 tax reforms (hereinafter, “Outline”) on 10 December 2020. This newsletter provides an overview of the major amendments and revisions contained in the outline.

The 2021 tax reform is the first overseen by the Suga administration since it began in September. 2020 will be remembered as the year in which Japan faced the COVID-19 pandemic and the worst economic slowdown since the end of World War II. The central government is faced with the difficult task of maintaining a balance between the implementation of policies to prevent the spread of the infection and sustaining socio-economic activity.

Particularly prominent in the 2021 tax reform are the revisions of current tax rules and introductions of new tax regimes aimed to support the three pillars of policy upheld by the Suga administration — successful implementation of COVID-19 countermeasures, promotion of digital transformation (“DX”) and acceleration of carbon neutrality. As the economy slows down due to the impact of the COVID-19 pandemic, many tax reduction measures related to corporate taxation are being introduced to support companies that are facing this harsh environment. New progressive tax regimes are also   being created in accordance with the promotion of DX and carbon neutrality policies. Another notable aspect of these reforms is the revision of many tax procedures in order to further digitalize tax administration.

Please note that the contents of this newsletter may be partially revised, deleted or supplemented in response to future Diet deliberations on the reform bill.
 

Contents

Corporate taxation 

1. Revisions to the R&D tax regime
2. Introduction of a digital transformation (DX) investment promotion tax incentive
3. Introduction of a tax incentive to promote carbon neutrality investments
4. Special measure concerning the maximum deduction of net operating losses (NOLs) carried-forward
5. Introduction of a tax measure to encourage M&As remunerated with shares
6. Revision of the tax regime to encourage wage increases and investments
7. Introduction of a tax incentive to assist SMEs with the consolidation of their managerial resources
8. Other
    

International taxation

1. Revision to the treatment of foreign withholding tax levied on foreign subsidiary dividends
2. Other topics
    

Individual taxation and asset taxation

1. Individual income taxation
2. Asset taxation
    

Tax measures to facilitate the development of an international financial hub

1. Relaxation of criteria for the deduction of performance-linked compensation provided to executive directors
2. Special measure concerning the levying of inheritance tax and gift tax on foreign assets in relation to highly skilled foreign professionals
3. Clarification of the tax implications concerning carried interest distributed to fund managers
4. Measures concerning the special taxation for foreign partners
    

Tax administration

1. Revision of the electronic ledger retention (e-retention) rules
2. Revision of obligations to affix seal impressions on tax-related documents
3. Countermeasures to combat international tax collection avoidance
4. Expansion of the tax agent system
5. Digitalization of tax payment procedures and other miscellaneous topics
    

Other

1. Revision of eco-car tax reduction measure of the automobile weight tax
2. Burden adjustment measure for fixed asset taxes on land
3. Revision of the start date of the application of the ratio that is consistent with the taxable sales ratio (consumption tax)
4. Revision of the scope of input tax credit requirements for gold ingot purchases (Consumption tax)
5. Preservation of documents required for export tax exemptions (consumption tax)
6. IR-related tax rules